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How can HR Deliver Strategic Value through Sourcing Programs for Clients with Captive Operations?

In the past 6 months I have worked with a handful of clients interested in selling their captive offshore operations. Throughout the due diligence processes, I discovered that the operations in question shared a number of HR challenges that, in my experience, are characteristic of captive operations in general. This discovery led me to to conclude that the captive model does not support the economies of scale required to deliver competitive strategic advantages, especially where HR is concerned. Allow me to explain.

In the past 6 months I have worked with a handful of clients interested in selling their captive offshore operations. Throughout the due diligence processes, I discovered that the operations in question shared a number of HR challenges that, in my experience, are characteristic of captive operations in general. This discovery led me to to conclude that the captive model does not support the economies of scale required to deliver competitive strategic advantages, especially where HR is concerned. Allow me to explain.

Captive resource levels tend to be relatively flat. They have long lead times to hire and train additional employees. Conversely, reducing headcount is a painful exercise that often results in a loss of knowledge. Sourcing providers, on the other hand, maintain a bench of highly qualified resources and continuously train and retool them on the latest technologies. This allows for rapid ramp up of resources when demand increases, or when requirements for skills mix changes. Moreover, resources can just as easily be reassigned when business slows down, even if temporary, thus enabling better knowledge retention. Captives, on the other hand, are simply not able to respond this quickly to rapidly changing market conditions.

Resource productivity is another common problem that captive operations face. They typically have more people than needed compared to what IT service industry leaders require to produce the same outcomes. Our experience shows that we can take on more work without increasing headcount.

The third common problem that captive operations share is a top heavy workforce distribution. Resources in the more compensated and more experienced categories account for a high percentage of their total workforce population. At first glance, this may seem like an advantage. However, junior resources not only are less expensive, they often bring knowledge of newer technologies and contribute to better succession planning. Therefore, it is important to have an employee ecosystem where the base of the pyramid is constantly refreshed. Unfortunately, captives struggle to achieve a balance by serving a single client. Service providers, however, have more opportunities to reshuffle resources between accounts over time to maintain the desired workforce distribution.

Finally, captives suffer higher attrition rates than the IT service industry average. By serving a single client, captive employees have limited opportunities for career progression. Such a lack results in stagnant skills, deterioration of productivity and ultimately loss of knowledge through attrition. By serving multiple clients, service providers offer more growth and development potential and enjoy lower attrition rates.

Captives are generally set up primarily to take advantage of labor arbitrage. However companies often fail to realize the strategic value of HR and under estimate what it takes to manage a successful offshore operation. Many have sold or are looking to sell their operations to local service providers in order to achieve greater value. What has your experience been? Have you seen similar issues with your captive?